Small business accounting: A guide to the fundamentals

For all companies — but especially small businesses and startups — financial clarity is key. Adhering to basic accounting fundamentals is crucial to obtaining this clarity, enabling you to better inform and guide your financial decision making.

Depending on your country and the structure of your business, you may also be required to record and present your financial records to ensure that you are following the right accounting standards. If you lack the resources and expertise to handle your company’s accounting, this can be a problem. 

In this guide, we’ll dive into the basics of accounting for small businesses — and demonstrate how you can easily avoid any potential issues. So let’s jump straight in.

What is accounting in business, and why is it important?

Accounting can seem like a daunting, catch-all term, but at its core, it’s simply the systematic recording, reporting, and analysis of your business’s financial transactions. Even if you aren’t legally obliged to present your financial statements, accounting is a critical part of tracking your profitability, controlling your cash flow, and making informed decisions.

For small businesses, the key components of your accounting responsibilities should include:

• Bookkeeping: Tracking daily transactions and maintaining organized financial records.

• Financial reporting: Creating reports that summarize your business’s financial health, such as income statements, balance sheets, and cash flow statements.

• Tax compliance: Meeting tax requirements by accurately documenting income, expenses, and payroll data, and filing and reporting correctly.

Without organized accounting practices in place, your business can easily fall behind on taxes, miss opportunities to cut costs, or overlook growth potential.

What are the basic accounting fundamentals?

To set up an effective accounting system, it’s essential to grasp the core elements involved. These form the foundation of accounting and are vital for keeping track of your company’s financial health.

These concepts are tracked in the following standard financial statements:

Income statement

An income statement — also known as a profit and loss (P&L) statement — shows your company's revenues, expenses, and profits or losses over a specific period (usually a quarter or a year). It provides a snapshot of how well your company is performing financially by detailing its revenue generation and operational costs.

The main elements of an income statement include:

1. Revenue: The income you generate from selling your products or services.

2. Cost of goods sold (COGS): The direct costs related to producing the goods or services sold by your company.

3. Gross profit: The total you get when subtracting COGS from revenue.

4. Operating expenses: The costs associated with running the business, such as salaries, rent, and utilities.

5. Operating income: Your gross profit minus operating expenses.

6. Other income and expenses: Non-operating items like interest income, gains or losses from investments, and taxes.

7. Net income: The bottom line, showing your total profit or loss after all revenues and expenses have been accounted for.

The income statement is essential for understanding profitability and is also used by stakeholders, such as potential investors and creditors, to assess your company’s financial health and performance over time.

Balance sheet

A balance sheet provides a snapshot of your company's financial position at a specific point in time. It details what your company owns (assets), what it owes (liabilities), and the value remaining for shareholders (equity). The balance sheet is based on the fundamental accounting equation:

Assets = liabilities + equity

The main components of a balance sheet are:

Assets

These are the resources owned by your company and are typically divided into:

• Current assets: Assets that are expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.

• Non-current assets: Long-term investments, property, plant, equipment, and intangible assets (like patents) that provide value over a longer period.

Liabilities

These are your company's obligations and debts, split into:

• Current liabilities: Debts or obligations that your company must pay within one year, such as accounts payable and short-term loans.

• Non-current liabilities: Long-term obligations like bonds, loans, or deferred tax liabilities.

Equity

Equity refers to the owner’s (or shareholders') interest in the business after liabilities are subtracted from assets. For startups and small businesses, this usually includes:

• Owner's equity (or shareholder’s equity): The initial investment made by the owner(s) or shareholders.

• Retained earnings: The profits kept in the business to fund growth rather than be distributed as dividends.

Cash flow statement

A cash flow statement tracks the inflows and outflows of cash in your business over a specific period. It helps you understand how cash is generated and spent, showing whether your company has enough liquidity to cover expenses, invest in growth, and handle unexpected costs. This statement is essential for managing cash, especially for small businesses and startups, where cash flow is often tight.

The cash flow statement is divided into three main sections:

Operating activities

This section shows cash flow related to the core operations of your business, such as:

• Cash inflows: Revenue from sales, collections from accounts receivable, and other operating income.

• Cash outflows: Payments for expenses like rent, salaries, utilities, taxes, and payments to suppliers.

A positive cash flow from operating activities usually indicates that your business is generating sufficient cash from its core activities to sustain operations.

Investing activities

This section shows cash used for long-term investments and purchases, such as:

• Cash inflows: Proceeds from selling assets, equipment, or investments.

• Cash outflows: Cash spent on purchasing assets like equipment, property, or other businesses.

For startups, this section often reflects cash spent on growth initiatives, like acquiring new equipment or investing in product development.

Financing activities

This section details cash flow related to funding the business, such as:

• Cash inflows: Money raised through loans, credit lines, or investments from owners or investors.

• Cash outflows: Payments made to repay loans, pay dividends, or buy back shares.

For startups, financing activities may primarily reflect funds raised from investors or loans taken to support early growth.

A cash flow statement provides a clearer picture of liquidity by showing actual cash movement rather than just profit or loss. This helps you to more effectively monitor your cash reserves, make informed spending decisions, and prepare for potential cash shortages. It’s particularly useful for identifying trends in cash flow that could affect your company's ability to grow or sustain its operations.

What are the main challenges of accounting in small business?

Some of the most common accounting challenges for small businesses include:

Cash flow management. As touched upon, cash flow management is crucial for startups and small businesses, with a lack of liquidity often cited as a key factor in businesses that fail. As a result, you should regularly review your cash flow statements and set a budget to ensure you can cover expenses.

Limited resources. Small businesses often operate without a dedicated finance team, placing accounting responsibilities on owners or non-specialized staff. This lack of expertise can lead to mistakes, missed tax deductions, and inefficient processes that affect profitability.

Complex tax compliance. Navigating your tax obligations can be challenging due to the variety of taxes (e.g., payroll, sales, and income) and frequent regulatory changes. Ensuring compliance without professional guidance increases the risk of penalties and audits.

Record-keeping. Accurate and organized records are essential for tracking expenses, calculating taxes, and managing finances, but small businesses often struggle to maintain consistent record-keeping, leading to errors or missing data needed for reporting.

How can small business accounting software help?

Accounting software can greatly benefit small businesses and startups by enabling you to streamline financial tasks, improve accuracy, and save time. It can automate functions like invoicing, expense tracking, and payroll processing, reducing manual effort and minimizing errors. This efficiency allows your business to focus more on growth and core operations rather than spending time on bookkeeping.

Additionally, accounting software provides real-time insights into cash flow, profits, and expenses, helping you make informed decisions. It can simplify tax compliance by organizing records, generating reports, and ensuring timely filings, reducing the risk of penalties. By centralizing your financial data in one place, accounting software can enhance organization, support scalability, and allow seamless collaboration with accountants, making it a valuable tool for small businesses aiming for financial stability and growth.

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How to select the right small business accounting software

Selecting the right accounting software can significantly impact your efficiency and accuracy. When looking for a provider, pay particular attention to:

• Invoicing and billing: Look for software that lets you create and send invoices easily, track payments, and set up automatic reminders.

• Expense tracking: Automated expense tracking tools help monitor spending in real time, which is crucial for maintaining a steady cash flow.

• Sales and corporate tax preparation: Simplify tax filing by organizing expenses and income, calculating tax estimates, and generating necessary forms.

• Financial reporting: A strong reporting feature provides an instant look at profitability, balance, and cash flow, giving you a much clearer picture of your company’s finances.

It’s also highly advisable to work with multiple specialist tools, rather than one general provider. For instance, you may opt to use one provider for bookkeeping, and another for payroll.

How can Remote help?

Remote Payroll is an ideal payroll solution for small businesses, especially if you have employees in different states or countries. As well as automating your payroll and minimizing errors, we ensure full compliance with tax laws and reporting requirements in multiple jurisdictions, and provide full support and guidance wherever you hire.

Our platform can also integrate fully with your chosen accounting software, making the entire process seamless. Example: Xero.

Small business accounting tips

As well as leveraging accounting, bookkeeping, and payroll tools, here are some other best practices to help you keep your finances in order and make tax season less stressful:

Separate your personal and business finances. Mixing personal and business finances can lead to confusion and potential legal issues. If you’re not already required to, consider opening a dedicated business bank account to keep things clean.

Track your expenses regularly. Logging expenses consistently makes tax preparation easier and helps identify potential tax deductions. Many small business accounting software tools can automate this process.

Plan ahead for taxes. Set aside a portion of income for taxes. In the US, for instance, keeping up with quarterly tax payments can prevent a year-end scramble and avoid penalties.

Use cloud-based accounting software. Cloud-based accounting software provides anytime access, automatic updates, and secure data storage. Tools like QuickBooks, Xero, and FreshBooks are popular examples of this.

Remember: consistency is key to making accounting easy and reliable, allowing you to focus on growth rather than catching up on financial records. By understanding the basics of accounting, implementing the right software, and using tools like Remote for payroll management, you can make informed financial decisions and stay compliant as your business grows.

To learn more about how Remote can simplify your payroll management — and how it can align seamlessly with your accounting software — speak to one of our friendly experts today.

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